Apple
hasn’t released pre-order numbers yet for its highly anticipated iPhone 5s and
5c, but if media reports and my own call to the Apple Store are any indication,
throngs of consumers will be lining up tomorrow to get the latest product. It’s very likely that most of the customers
have no idea of the highly successful campaign against Apple and other
electronics manufacturers that led in part to Dodd-Frank §1502, the conflict
minerals provision which is now up on appeal to the DC Circuit. Incorporated
into Dodd-Frank only days before its passage, it aims to focus investor and
consumer attention to potential corporate complicity in human rights abuses in
the Democratic Republic of the Congo (“DRC”), a country where the United
Nations recently deployed drones against rebel groups and where over five
million have died due to civil wars, malnutrition, disease and poverty in recent years. Eighty
thousand people were displaced from their villages due to fighting between rebels and the army in
just the last month according to a report out today from the UN. A UN
representative once called the country was once called the “rape capital of the
world.”

The
law affects an estimated 6,000 companies--almost half of all US publicly-traded
companies--
and hundreds of thousands of suppliers worldwide because so many products
use one of the four regulated minerals, often mined by hand, known as the ”3Ts +G”. Specifically, these are: (1)
columbite-tantalite also known as tantalum, which is used for cell phones,
computers, surgical implants and wind turbines; (2) cassiterite, or tin, used
for coatings for food cans, solders, catalysts stabilizers, shoe soles and even
fluoride compounds in toothpaste and mouthwash; (3) wolframite (tungsten) used
for light bulbs, aerospace components, and machine tools; and (4) gold used as
an electronic conductor, for jewelry, and in medical equipment, anti-lock
brakes, stained glass, and home pregnancy kits (in nanoparticles). Anyone who buys thread or diapers is also
using these minerals.

The rule requires domestic and foreign companies
regardless of size that file reports with the SEC to conduct due diligence and disclose
the origin of minerals in their products from the DRC or adjoining countries to
ensure that they are not funding rebel groups engaged in rape, torture, the use
of child soldiers, exploitation of children and other activities that have, in
part, led to one of the world’s largest and most protracted humanitarian
crises. Depending on the company's findings, the rule also requires a private
sector audit and the filing of a Conflict Minerals Report that describes the
due diligence. Large
companies must file their first disclosures in May 2014 for activities
occurring in calendar year 2013. Some companies have 10,000 to 50,000
suppliers and several layers in their supply chains. Their suppliers can have
multiple levels and subcontractors within their own supply chains.

Significantly, the law does not
prohibit the use of conflict minerals. It merely requires companies to disclose
if they are using them or if they cannot determine whether or not their
products are “DRC-conflict free.” This law relies on consumers and investors
to pressure firms that depend on corporate social responsibility programs to
enhance
their images to change their business practices. Last week, the SEC
received a petition
for rulemaking requesting a temporary
delay in disclosure and an alternative disclosure, due to the expense and time
required to comply.

Regardless of the law’s fate in the
US, companies that operate in Canada and the EU may face similar legislation.
In some sense the proposed rules are broader than Dodd-Frank §1502 (e.g. applying to
recycled and scrap metal) and in some cases more narrow (eg. the level of
companies in the supply chain). The European Commission received recommendations from
NGOs that seek legislation regarding all
natural resources originating in any conflict-affected or high-risk areas worldwide. On the other hand, an
August report
by Oeko-Institut, an organization that guides policymakers in the EU, notes
that (1) smuggling by armed groups in DRC has increased; (2) a comprehensive DRC policy
that includes but does not rely solely on regulation of conflict minerals is
the only way to provide meaningful assistance to the DRC; and that (3) extensive mandatory verification and reporting requirements based on downstream due
diligence can cause “embargo reactions” from those who source
from the country. I agree and will discuss why in Part II.